Navigating Estate Taxes at the State and Federal Level

California has some of the highest tax rates in the entire country. If you are planning to leave your loved ones an inheritance, you might be worried about how taxation will affect your legacy. While California no longer levies an inheritance tax, your heirs may still be affected by taxes.

The California Estate Tax

Since California taxes residents heavily, many people mistakenly believe the state will take a big bite out of their inheritance.

However, California eliminated its inheritance tax nearly a half-century ago. Since 1982, the state has not imposed any form of “death tax” or “estate tax.” However, unprotected estates can be affected by taxation or other financial penalties.

The Federal Estate Tax

While California no longer has any estate tax, the federal government still does. The federal estate tax can affect any unprotected estate valued at $11.7 million or above; this amount will increase to $12.06 million in 2022.

Any amount exceeding the minimum criteria for the federal estate tax is called the “taxable estate.” When an estate exceeds the minimum criteria, it can be taxed up to 40% of its value.

The exact percentage is determined by the taxable value of the estate. If the “taxable estate” is between:

$1,000-$10,000, the estate is subject to a marginal tax rate of 18%.
$10,000-$20,000, the estate is subject to a marginal tax rate of 20%.
$20,000-$40,000, the estate is subject to a marginal tax rate of 22%.
$40,000-$60,000, the estate is subject to a marginal tax rate of 24%.
$60,000-$80,000, the estate is subject to a marginal tax rate of 26%.
$80,000-$100,000, the estate is subject to a marginal tax rate of 28%.

The marginal tax rate increases by 2% in $20,000 increments up to $1 million; any estate valued at more than $1 million is subject to a marginal tax rate of 40%.

Avoiding the Federal Estate Tax

Avoiding the federal estate tax can be challenging, since the Internal Revenue Service (IRS) will look at the total value of an individual’s assets, including assets they do not own but otherwise hold an interest in. This means, an individual estate may not be fully protected even if assets are shielded by a trust.

However, an experienced California estate planning attorney can help you identify and design solutions specific to your estate’s unique needs. Married couples, for instance, may be eligible for an estate “portability” exemption. This means, if one partner passes away, their spouse effectively inherits any remaining portion of their unused estate tax exemption up to $12.06 million.

By using the portability exemption, couples can plan to protect up to $24.06 million in assets.

However, this exemption is not automatic: the surviving spouse will have to file special paperwork with the IRS to keep their assets safe and untaxed.

The portability advantage is also time-sensitive, in that the surviving spouse of a deceased person will have to submit attesting documents to the IRS within two years of the decedent’s passing.

How an Attorney Can Help

The portability exemption is available to most married couples with a high net worth. However, this exemption is imperfect and only protects assets up to $24.06 million. Anyone whose estate exceeds this amount will need an estate planning attorney’s help to identify alternate asset protection strategies.

The Law Firm of Kavesh, Minor & Otis, Inc. has years of experience helping California residents plan and protect their legacies. No matter how much your estate is worth, our hard-working and resourceful team of legal professionals can find the right solutions to safeguard your assets. Send us a message online to schedule your free initial consultation today.

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